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Nationalizing a Bank?? You Really Should Read This!!

By Larry Doyle on January 23, 2009 at 7:40 AM in American Consumers, Banking Institutions, Current Affairs, Economic Stimulus, Economy, FDIC

We had a few readers ask about the prospects and meaning of nationalizing parts of our banking system. For those who have already seen this Q/A, I beg your indulgence as I try to spread the importance of this topic to a wider audience. Also, to our friends MBC and his close cousin MPC, I hope you do not mind my sharing your questions.

Comment by MBC | 2009-01-21 21:15:32
Hi LD,
Can you explain what the ramifications are if we nationalize US banks?

You had written in a previous thread, “the strong likelihood that the banking system in the United States has some form of nationalization. These are truly historic and challenging times and how this banking meltdown is handled from here will be both gut wrenching and critically important to our immediate and long term economic health and well being. We will be watching VERY closely.”

Thanks so much, remember like you are explaining to a high school student.

Comment by LD | 2009-01-21 22:02:46
MBC,
Well, given that we have never nationalized banks and had them continue operating all I can do is offer my opinion.

We effectively have nationalized banks via the FDIC (Federal Deposit Insurance Corporation) but then paid off the depositors and closed the doors after selling off assets.

That is what I am recommending for institutions that are deemed insolvent. This approach was taken in Sweden in the early ’90s and the economy recovered fairly quickly (a few years).

In these instances, the shareholders are effectively wiped out. The creditors (people who have lent money to the banks) would get paid out up to the FDIC limit (250k) for individuals. For institutions which have lent money, they would have their repayment largely if not totally guaranteed by the government.

Departments or divisions that have value could then either spin themselves off or be sold. After all this is done, shut the doors. The party is over.

Why would such Draconian steps have to occur? Simply because the losses on loans of all types along with losses on investments will have overwhelmed the capital in the bank.

A second approach would have the government nationalizing the institution but then continue to operate it in hopes of generating revenue to write off the losses.

What is the risk here? That the losses on the loans and investments just merely get worse and it ends up costing even more money down the road than it would cost right now. This approach was taken in Japan in the ’90s and the economy did not turn around for a full decade (it is called The Lost Decade)

In each of these scenarios we need to be aware that the motives of the government are far different than the motives of private capital. The government is here to serve the public welfare. The private capital is in business to serve the interests of shareholders. Given changed motivations, we can only assume there will be different business practices.

Ultimately, we are trying to achieve not only stability in the banking system as a whole but growth and increased lending.

Does this make sense? Hope it helps.

Comment by LD | 2009-01-21 22:11:46
MBC,
After writing my own response to your question, I just saw this article from the Wall Street Journal, “What if Uncle Sam Takes Over Your Bank?” The people there must be monitoring NQ for ideas….(lol). I have yet to compare my reply to the article.

Having now just read the WSJ article, I hope that my comments with their details fully clarify the nationalization topic.

~LD

Gary McGowan

LD, What’s your view on the role of derivatives in this economic mess? Seems to me they must be a major, major part of the problem.

http://sonicninjakitty.wordpress.com Sonic Ninja Kitty

I would love to hear LD’s take on this, too!

LD

down a few posts…

BernieO

Credit default swaps, which are a kind of derivative, played a huge role in the mortgage meltdown.
That being said, I think there is a role for these kinds of instruments that spread risk. You need to allow a certain amount of risk-taking to have a vibrant economic system. The problem was that there was far too much risk-taking and it was hidden by ratings agencies so investors who wanted safer investments were misled. That is why we need regulations and oversight.

LD

Bernie….TOTALLY agree. Derivatives are great for managing risk as long as they are not abused and end up CREATING risk. For that reason we need strict oversight.

Gary McGowan

I’ve been saving this for about five years, I think; had to search it out in old archived files:

Over The Counter Derivatives:

1. They have no regulation.
2. They have no standards.
3. Without standards there can be no viable market.
4. They are unlisted
5. They are traded by private treaty negotiation
6. They are valued by “Mark to Model” which is a total cartoon.
7. They have no financial guarantee such as a clearing house.
8. They are unfunded special performance contracts floating in cyberspace. All funds in the OTC Derivatives are taken out as spreads and commissions.
9. More than 50% of the earnings of major international investment banks come from granting in private treaty negotiations these instruments of mass financial destruction.
10. The financial performance of the specific performance contract called OTC Derivatives depends on the financial capacity of the loser in the transaction.
11. Control has been loose in the interest sensitive OTC Derivatives because of multiple dealings outside of the initiating two until no one knows who has what.
12. The replacement value of these instruments is in the multi trillions of dollars. [Recently, some have said it may be quadrillion; who knows?... Or can know? - gm]
13. The size of this is more than 2 Trillion dollars in replacement cost. The massive expansion has come in interest sensitive and debt guarantee instruments. Those are the most vulnerable.

That, I believe, was written by Jim Sinclair, who really knows what he is talking about in terms of day-to-day market operations.

http://sonicninjakitty.wordpress.com Sonic Ninja Kitty

Welcome to Vegas.

LD

Gary,

On November 12th, I wrote a piece entitled “The Wall Street Model is Broken …and Won’t Soon Be Fixed” If you have not yet read this piece, I would strongly recommend that you and everyone else read it so that you can more fully appreciate how and why we are in this position. As you read the article, please note that derivatives are synonymous with “synthetics.” In regard to your question, I wrote:

In 2005 or thereabouts Wall St. had such a voracious appetite for volume of collateral product that they pressed the envelope even further and came up with “synthetic” structures. These structures purely used a pool of known collateral (be it sub-prime mortgages, home equity loans, corporate loans, et al) as a reference pool for the stream of cash flows in the deal. Wow!!

Without the need for actual collateral Wall St. really rocked. (REMEMBER THIS POINT)

Under the “originate to distribute” model Wall St. hired reams of financial quants and engineers to structure deals. Wall St. grew their distribution efforts globally to sell these products far and wide.

Life was good!! … or so they thought.

Wall St. actually started to think they were as smart as everybody told them. Wall St. thought that their own models were so robust because they had the smartest minds build them. Wall St. thought that they had become so effective at “distributing” risk that they were blind to the fact of just how much risk they “created”. Then the music stopped. The Fed needed to increase rates to slow the pace of inflation that was emanating from global economic growth especially in Asia. Mortgage rates reset at higher levels. Freddie and Fannie started to show signs of distress. Wall St. pressed so hard that they “killed the goose that had laid the golden eggs”.

Against that backdrop, through the 3rd quarter in 2008, check out the volume of underwritings in these respective sectors vs 3rd quarter 2007.

Deals using mortgage collateral … … down 95%!!!!!!!!
Deals using commercial mortgage collateral … … down 89%!!!!!!!!
Deals using consumer assets … … down 75%!!!!!!!!

The mortgage and asset backed markets (including commercial mortgages) are twice the size of the overall U.S. government bond market and app half the size of the U.S. equity markets. The mortgage market doubled in size from the end of 2003 until the end of 2007!!!

Investors now fully appreciate that with the economy slowing and seemingly picking up speed that delinquencies and defaults will continue to ratchet higher. The embedded losses are only exacerbated by the massive leveraging that occurred via the use of “synthetic” cash flows. No, the media has no appreciation for this and will not share it with the public.

Where are the other shoes that have yet to drop??

Please refer back to the “synthetic” structure that I discussed. These synthetic structures grew exponentially with the growth of a product called the “credit default swap” or CDS. This product, in theory, is outstanding because it acts to protect investors against defaults on the underlying referenced corporation or entity (such as sub-prime mortgages). That said, instead of helping to distribute risk the CDS market has effectively “created” risk because it has grown to the point where it now is 10 times the size of the overall corporate bond market that it is supposed to be tracking.

Yes, the tail is very much wagging the dog. Hedge funds dominate the trading activity with close to 60% of the overall trading volume. Hedge funds have gotten good press so far for not having had many “blow ups”!!

Give it time, because hedge funds do not have to report to anybody as to what their positions are and where they have them marked. There is no doubt that they have positions that are grossly mismarked and that they have many positions that are totally illiquid. For many investors in these funds these are truly “roach motels”. Hedge funds will sell what is most liquid when they can to meet redemption requests. We should expect a significant number of hedge fund liquidations, consolidations, and out and out disasters.

Hope this helps you make some sense of it!!

Gary McGowan

Thank you for all your work!

Blows my mind that

“…to slow the pace of inflation that was emanating from global economic growth.”

anyone could get away with calling that mess “economic growth.” I think economic growth is about standard of living (drinking water out of the tap, mass transit, development, space programs, …)

The article you wrote and refer to is at this link:
http://www.noquarterusa.net/blog/2008/11/12/the-wall-st-model-is-broken-and-wont-soon-be-fixed/

I’ll try to read it today.

CG

General Electric’s quarterly profit down 44 percent…

LD, you may never have expected to be this busy in retirement, with each day another economic disaster, a new post from you is required to help us make sense of it…

LD

CG….drinking from a firehose!! I’ll keep writing as long as people keep reading.

sandshark222

The thought of government taking over more banks and corperations makes the hair on my neck stand on end.

The government couldn’t run Fanny Mae or Freddy Mac effectively, what makes anyone think they can run banks?

Sorry folks, the feds have proven themselves incompetent with all this bailout money. They don’t even know where half of it went.

We were sold a bill of goods and so far have seen nothing in return. The best thing the govt can do right now is back off, and let the private sector fix this government created mess!!!!!

tek

What makes you think the private sector can run anything–banks, corporations, whatever–efficiently? They are the people who got us in this mess. Don’t kid yourself that it’s all Fannie and Freddie. This meltdown is the result of unimaginable greed and callousness in the private sector–aided and abetted by the Bush administration. If we’re going to have capitalism, it must be REGULATED capitalism. It’s nuts to think businesspeople are going to be moral or ethical. All they care about is profit.

FDR tried to let the business community regulate themselves in the first New Deal. He had to rescind it and put them all under government regulation.

sandshark222

The private sector has been what made this country great for the past 200 + years! It’s the hard work and ambitions of Americans. Now thats not to say that there are no greedy crooks out there, and they did play a factor.

However, it was the likes of Barney Frank and Chris Dodd pressuring banks to make loans to people who couldn’t pay them back all in the name of affordable housing. Throw ACORN into the mix with them shaking down banks and lenders, and you’ve prepped yourself for a financial collapse.

If you think the government is the answer on this one, you’re sadly mistaken. They’re the cause of this mess, not the solution.

athena

sandshark is right here….

Regulations were pushed and the dems pushed back saying everything was fine. Those same bozos are still in control now. It is truly maddening to watch this crisis unfold daily in the light of day. I feel a revolt by the American people coming……
MPC

It is truly refreshing to read someone’s well thought out observation like this in the comments section every once in awhile amidst all the absurd conspiracy theorists running around like headless chickens.

LD

Shark….I do not disagree with you that the governemnt does not have enough competent people to run businesses on an ONGOING basis. For that reason amongst others I am proposing that certan institutions get nationalized and in the process sell divisions that have value. Pay the depositors and creditors and “party’s over”.

I concur that the private sector should be the vehicle that determines interest rates for the mortgage market. Freddie and Fannie should run the operation like Ginnie Mae in which they merely pool mortgages, create securities, collect their fees, and sell them into the market. That was the original mission. Paulson promoted this concept before his departure.

We are more in agreement than you may think.

sandshark222

I’m not opposed to government help either LD, it’s just that I fear the government taking control for too long or just not giving it back at all.

The feds have the ability to help out big time right now, but they also have the ability to screw things up royally.

After how they conducted the last bailout, I can’t help but remain skeptical. I also haven’t been impressed with Obama’s choices over the past year – and that doesn’t exactly breed confidence.

If the government can nationalize what it needs to on a temporariy basis, and return all assets back to the private sector when promised, that’s great. The question is – is that what will actually happen?

MPC

This was the point that was bothering me when I was thinking about this yesterday. The key to any nationalization is going to be, as LD describes, promptly taking care of creditors and closing up shop. I do NOT trust Barney Frank (who I’m ashamed to say was elected by my district…I need to move), Dodd, and Congress to do this without thinking of their own special interests.

sandshark222

Don’t forget, any bill that goes through their hands will be filled with goodies and pork for their special interests. It’s disheartening.

Gary McGowan

Roger Bootle, Daily Telegraph, Dec. 17, 2008:

“Banks provide the lifeblood of the economy – credit. So when the banking system is damaged the impact potentially spreads across the economic system as a whole. It is the equivalent of shutting down the electricity supply…. That is why, at key points in financial history, governments have had to step in and effectively nationalize banks. And it is why, in structuring a financial recovery, bad old debt has to be separated from the continuing business of new lending…. The current situation has the makings of one of those major economic events which, like the ERM debacle, not only wreak havoc in the financial system but alter the lives of millions, break reputations, reshape institutions and overturn the political consensus.”

I’m asking myself, “What’s the difference between nationalizing banks and putting (the bankrupt ones — which, I suppose is almost all the major ones) through, literally, bankruptcy reorganization? — Sorting out the legitimate claims from the fraudulent ones, and the claims that should just be put on hold until things can be gotten functioning again.”

I’m not an attorney, but it seems to me that the Bush – Paulson bailout was illegal fraud for the most part.

truthorconsequences

According to Nixon (bless his evil soul) if a president does it (whatever “IT’is), “IT” isn’t illegal. Last week one of the National News Networks reported that “The Obama administration was considering “A” government bank to help ease the situation”. ??????????? Write everything off–the good, the bad, and the ugly– and start out with a brand new clean slate. China might not like that idea.

Gary McGowan

Writing everything off would be insane. I want the gambling debts written off — why pay good money for the chips of a failed casino?

http://sonicninjakitty.wordpress.com Sonic Ninja Kitty

I want my stocks that went south written off, too.

http://sonicninjakitty.wordpress.com Sonic Ninja Kitty

Er, I mean, bailed out!

truthtelling007

LD thanks for your insight.

I am not an economics guy, but my knowledge of history is pretty sound. I’m familiar with the First Bank of the United States, proposed by Alexander Hamilton, and the Second Bank of the United States established in 1816 by Madison, but then we went into the “free banking era”. From 1893 till 1913 we saw the establishment of the National Banking Act. And in 1913, we saw the establishment of the Federal Reserve.

Now in all these cases, we kept trying for a centralized banking service, and yet each had major weaknesses or incidental shifts in our country that caused collapse or depreciation of the funds and investments.

Is there anything in these historical efforts that we can learn from to apply to our current need to look at banking in the US? And are there some solid strengths from these different experiments in centralized banking that we can learn from?

Again, I’m not very good at economics. I just know we’ve had many attempts at “nationalizing” our banking and it seems we haven’t done much better by having private sector banking.

Thanks for your insights.

LD

Truthtelling007….

I am not going to pretend that I am a financial historian or scholar. My background is in finance and sales/trading on Wall Street.

Minds far sharper than mine that have dedicated their lives to studying these issues over the course of a lifetime.

I do think a system of serious checks and balances with strong competent LEADERS filled with integrity is truly what we need.

http://sonicninjakitty.wordpress.com Sonic Ninja Kitty

Great post, LD. It is so critical for us to understand this topic. Nationalization requires that we have absolute trust in our government that they 1) know what they are doing and 2) will relinquish control later.

To point #1, from the WSJ article:

“I think we can expect that over time, the nationalized banks will be less open to innovation and new product development, more conservative in their approaches, and more constrained in their actions and subject to tighter scrutiny,” says Jim Eckenrode, banking and payments research executive at TowerGroup.

Yeah, right. Exactly the opposite of what our government did with Fannie/Freddy and TARP! Confidence, anyone?

To point #2: look at who we have now. I don’t want to go into a tirade here (it could go on for hours), but ALL evidence indicates Obama and this Congress will never relinquish control.

We have got to wake up! Why are we scrambling to nationalize everyone’s losses all the time? When these banks/mortgage brokers/companies/shareholders were rolling in dough, were they willing to nationalize ALL their profits? No way!

Yes, it disrupts lives, communities, etc if institutions go under, but the more the government stands behind them, effectively saying ‘do what you want–we are always here to clean up’, the less careful and efficient they become. We spiral downwards in strength, independence, and liberty.

http://sonicninjakitty.wordpress.com Sonic Ninja Kitty

Oh yeah–and PROSPERITY!

sandshark222

If you think of the amount of liberty we’ve lost in just the past two years alone, it’s astonishing. It doesn’t look like Obama is going to be giving those liberties back anytime soon, either. Rather, he is poised to take more away.
LD

Your points are very well taken.

truthtelling007

“if institutions go under, but the more the government stands behind them, effectively saying ‘do what you want–we are always here to clean up’, the less careful and efficient they become”

I think this is a great point.
So what is the tipping point then between what we need and what we have?

I’m not for bailing out private banks and companies when I wouldn’t ask for a bailout for my company. As the owner of my own business for over a decade, I get in binds due to not seeing the full financial picture, but would never think about going for a government bailout. Our staff is small and deliberate. So if we lose out, it is our own fault.

But since it is apparently the new American tradition to build megacompanies right and left, can we at least consider that maybe the problem is in the greed and gluttony of these companies, and that those who go work for these companies, no matter how well intentioned, are setting themselves up for disaster by following the same greed and gluttony?

If we are to consider individual accountability, then how can we keep endorsing a system that allows big fish buying to go unchecked until the whole thing collapses again and again?

I really abhor simplifications, so feel free to point out simplifications in my understanding of economy, I have nothing to be boastful about in the knowledge of economy. But it seems to me that the majority of this problem is based on unreasonable expectations not only from CEOs but from base level workers who rely upon trust of “leaders” instead of being more driven to be self-sufficient and self-motivated, and not selfish motivation, just personal responsibilty.

I know people who worked for Enron for the years it was around. When it collapsed I did a ton of interviews for local papers and radio with many people who just lost everything, and the commonality in them was an irrational belief in a company that was going to help them become stable and rich. We can see that was a bunch of bologna.

So now that we see the Former Merrill Lynch chief executive John A. Thain has blown more and more money as we were bailing out the Bank of America.

What reality check is needed to get citizens to get their collective heads out of their asses?

Using the car companies as a juxtaposing setting, if the major car companies fail, the knowledge and technology doesn’t need to disappear. The workers are still just as skilled, it usually has to do with bad leadership. If companies like GM fail, then why must there be a loss of all that human investment?

There seems to be something we are missing about human behavior in this whole equation. Instead of discussions on dividends and the like, what about the inner psychology that is repeating these bad patterns of failure?

I see this difficult time as a watershed moment, but I don’t want it lost. Often times the best time to learn is in the middle of a crisis. I’ve heard it said by brain experts that the brain is 10 times more active in learning during crisis than at rest. What are we to learn now, by looking back at past events, that we keep missing?

Thanks for your insights.

http://sonicninjakitty.wordpress.com Sonic Ninja Kitty

Hi! I know you are asking for LD’s wisdom, but I just wanted to say something you made me think of.

The SEC is supposed to be our regulatory and oversight institution. There are private companies (Fitch, Standard & Poor, and Moodys) and large institutional banks that give bonds and companies ratings like ‘AAA’, etc. All of these people were either way off or asleep at the wheel! Whose fault is it, theirs, or the accountants at the companies who use creative methods to make things look good, or the people who create GAAP for not making stricter accounting rules, or the SEC for not calling for investigations sooner?

Whatever. The primary problem is these ratings institutions have conflicts of interests when it comes to rating all these companies. Investors (and employees, too) are not aware of this–they don’t have the honest information. This is not a free market system. We have to figure out how to remedy this and provide accurate, unbiased information for people to make their decisions with.

Greed itself will never be eliminated from human nature. I think we can set up the system to limit the way greed corrupts it, though.

truthtelling007

True enough for regulating top level, but do you think there is a way to moderate and change the expectations of the lower level employees too? Or do you think that will only come if we truly regulate their CEO, CFO, COO staff? Often the example set by the top trickles down.

But after years of talking to people who run from job to job, or stay in one career path to see failure after failure, I can’t understand their mindset and expectation.

I started my own business for that very reason. Because we are small we don’t have shareholders and all, and I can make direct vital decisions with little hindrance.

Yet my background in management was from major corporations that are either gone now because they went public, or because they went to venture in a market that they didn’t have a natural growth in, because they made bad decisions about top level profit vs reality of the economy, and from exploiting the workers in a class strata.

In each case, micro level managing produced results. After you went even one rung above me, the results became codified as “must be up over last year”.

I’m convinced, and maybe wrong, that it really has to change at the root level. Citizens who work for any company have to be just as aware of their mindless selfish desire to “move on up” and “make it” as the CEO. It sucks that so many people lose their entire lively hood by trusting people who, if given a moment of rational thought, have given no such reason to be trusted.

Quick closing example for thought:
I worked as a remodeling regional and occasionally roving manager for a now gone drug store company about 15 years ago. It was a family own business that was run very tightly and efficiently. They had hundreds of stores in the south and east, and after the namesake died, they went public because the family wasn’t into the biz. The moment we heard it was going public, I said clearly to my regional guys and other managers, “they’ll be gone in 5 years”. And…they were. JCPenney’s bought them for a while, then CVS bought the remainder.

But it was entirely predictable what would happen because the heart just got gutted. When you have shareholders determining the value of everything, there is a conflict at that level. Shareholders are concerned with one thing, bottom line profit.

What in human nature must we understand, regardless of the need to eliminate it, but to understand it, that can help us change not just at the top, but also in the working class mindset?

Or in other words, what must we do to have the expectations of the workers affect the system as well?

Thanks for your thoughts, SNK. Very insightful.

http://sonicninjakitty.wordpress.com Sonic Ninja Kitty

I have learned a lot from your comments. Thank you!

Gary McGowan

Sonic asked, “Whose fault is it,…?”

I think we need New Pecora Commission hearings.

LD

Truth…Well said !! I do sincerely hope that what comes out of this mess is the need for a true focus on the values of:

living within if not below your means…

family and the values that come from strong families are invaluable…

discipline

value of savings…

accountability in every regard…at work, home, and in the community…

helping those who need it while requiring those who can work to get involved…

Sorry to digress and don’t mean to preach but I do firmly believe these things.

I hope that this forum can allow people to not only voice more fully understand and appreciate the dynamics at work in the economy and markets but also promote a path for the future.

You are right …this is a HISTORIC moment in our country. How will we be judged?

Thanks for your thoughts.

Interested party

Enthusiastically and exactly yes!!
This is at the core of the problem. This applies to everyone, from welfare recipients to CEO’s. In borrowing the three legged stool analogy what’s needed is production, savings and honesty. Government can supply the bracing for these legs, but it is not the legs itself, which are stuff of private enterprise, whether that be an individual, a family or a nation.

ChooChooMagoo

LD great article

like many, my mind seems to be perpetually reeling with all that is happening and on so many fronts. Then just when I think I’ve got a good grasp of things, the next jaw dropper happens and the universe goes swing wildly in another direction. Or someone says something that sounds all sensible and logical, until you point out the misleading statements and assumptions being made. Thanks for all you do.

I really found TT007′s comments thought provoking. I really think its a critical point here. We can’t just blame it on corp. and ceo’s. We, as the average man and woman, have to take responsibility and action. We can’t just sit back and let the powers that be decide how to fix things. Because at the very core of everything, this mess is only a reflection of how far away from our true and authentic selves we’ve become.

As a society we been chasing after “things’ and the money to by them because we deserved more than the joy of creating, the sweat of laboring, the frustrations of learning, the excitement of acheiving, the lessons of failing.

I guess, what I’m saying is, I don’t think we are having that most important discussion. We can’t go back, life as consumers is not sustainable. We’ve proven that. The reason for big corps, was to max profits. Well, there are limits to greed. We’ve proven that. So, what are our priorities – as a society and people. Because all else will evolve from that.

We’ve basically proven the world is round. And that what we do, we become. And what we become, consumes our world. So what now? Which way is forward and how do we get there.

Who are we as a people? And what do we want to get consumed by? That’s my profound thought for today.

LD

Choo Choo….I commend you. Well said. You are right. There are even BIGGER issues at work here. Will we see them and learn from them??

ChooChooMagoo

LD – Sorry. Missed your post just above mine the first time around. You and Interested party seem to be on the same wave length – core social values, honesty, humility, commitment …

I am trying to be hopeful, but wonder if we have trained ourselves to be sheep too well. What I’m mostly hearing now is gloomier than over the holidays, but still pretty reflective of a “The current melt down has left us shorn, but no need to panic, we’ll simply waiting for our wool to grow back” mind set.

Can we empower ourselves to be independent thinkers, leaders, workers and learners again? Not as a means to advancement, but as a life style of personal growth and personal acheivement. It would mean reclaiming personal responsibility as a badge of honor. And it would mean forsaking corp and gov’t training wheel for our own two feet. And that may be the sticking point. We’ve evolved into a society that generally likes to think and walk as little as possible.

Sorry, a bit gloomy after yet another “yeah, but” conversation.

LD

Choo Choo….I understand from where you come. I am definitely a believer that eevrybody is and can be the “master of their own destiny” but that process is LOOOONG and will go through plenty of ups and downs. We need individual character with unquestioned integrity. Regrettably those qualities are in short supply but each individual can do the best job within their own circumstances. I am not intentionally trying to be harsh, anything but, as these values are ALWAYS vitally important.

ChooChooMagoo

LD – A bit of a chicken and egg dilema. What we most need in our current crises is leaders of independent thought and unquestioned integrity. And yet they are in such short supply because we have valued conformity and speciality (narrow focused outlook) over personal responsibility and integrity because that is what better served our enshrined corp interests.

Have you seen the movie King Corn? Two college student show how firmly immeshed gov’t and corp have become in the growing of corn and the absurd degree to which we as a society lose out in every way possible through out the process is truely amazing. And all along the way, everyone shrugs their shoulders and go along with the process because they feel it is in their best interest. Corp, govt and personal interest are aligned.

To change the way we do business and conduct our lives, is going to take more than leaders. Its going to take all the average joes & jos saying enough. It’s in our best interest to look for a better way. To re align our priorities. We all have to think beyond the here and now and me and mine.

LD

Choo Choo…I have not seen that movie but will put it on the list.

I agree that the changed approach needs to be all encompassing. I do think though that the followers take their cue from the leaders.

We are all in this together, whether we like it or not.

tek

Sonic: your comments illustrate the deep damage the Bush administration did to this country. Also, I don’t like Obama or his minions, but really, if George W. Bush didn’t establish a tyranny, it can’t be done. Stop sweating the small stuff.

http://sonicninjakitty.wordpress.com Sonic Ninja Kitty

F.A. Hayek dedicated his awesome book on economics, The Road to Serfdom: “To the socialists of all parties”. Of. All. Parties.

I remain sweaty.
athena

Really – you did watch the news coverage over the past 2 years right? He can do no wrong in their eyes. He has the unquestioning adoration of millions (oh and he has their cell phone numbers and email addresses to rally their support)to call to his aid when he wants to further his aggenda. Don’t be so naive…. If anyone can do it – this 47 year old man who has spent his whole career running for the next position, and came from literally nowhere to be our 44th president can. ANd he has the majority of democrats who would like to have more and more control.

truthtelling007

“he can do no wrong in their eyes.”

well, this is how Bush was received by many when he left my state torn up. He too never held public office, then ran for governor, then for president. He was surrounded with people who had rather draconian views of government, and realized many of them.

And sorry, but I think you insult the country when you suggest that celebrity adulation of Obama will translate to ‘tyranny’.

“you did watch the news coverage over the past 2 years right?”

Yes, the “news coverage” isn’t a monolithic entity, or you wouldn’t know about Rezko, Wright, Pflegher, Auchi and others.

No?

If you think the “media” have overblown him, then I wouldn’t then lend agreement to this vast greatness by suggesting he could establish “tyranny” here if Bush couldn’t.

getfitnow

Thanks LD. Lots to chew on. I’m with Sonic ninja–absolute trust is required. Question–is sec of treasury going to have the same sweeping power that Paulsen had?

LD

Yes. Geithner will have just as much authority as Paulson. I do think though that we will see and feel more of a team approach from this administration.

MBC

I am not sure, no I am positive, that this gives me no comfort. How can we trust Geinther to give us the tools to move out of this mess when he has difficulty using Turbo Tax. I am not buying his lame excuses one bit. Had I or anyone I know overlooked payment of $40K in taxes we would have been provided with a “friendly” reminder from the IRS to the tune of garnishments, attachments, etc.

fiscalliberal

Could it be that the Investment Banking system screwed things up so bad because of greed and incompetence of risk taking that the government was forced to do something.

We need to take into account that a lot of commercial banks did not partake in this madness. I suspect that these banks were run by officers who had some sense of history (1929) and new what risk was.

I do not believe people want to “nationalize” banks. However like LD says they have to take them over, get rid of the bad apples and let the competent banks have the playing field. Paulson (from the industry) is trying to protect the inustry versus doing what a regulator should do (clean house).

The stimulus will only work when there are good banks to leverage the government investment. I think the public also needs to see some trials at 10 AM and hangings at Noon, letting them rot in the sun.

Then the public will trust investment and get back into commerce.
Sammie

I wonder what impact nationalization would have on bank stocks and the banking/financial sector across the board. If equity holders for banks such as Citi get wiped out, I would think it could put a damper on people being willing to invest in such large institutions going forward.

Granted, with Citi, there were signs, but I believe the extent of the problems came as a surprise (either that, or people were purposely lying in financial articles and reports). A recent article said most of their directors are “retiring” so that implies they weren’t doing their jobs.

Personally, I wish the government could seize some of the board members’ compensation, along with the bonuses of the upper management, which were obviously based on faulty financials (as it stands right now, they are essentially be allowed to get away with stealing all of the stock holder equity by cooking the books, failing to adequately measure or manage risk, and stealing the cash). So far, there has been no real accountability or prosecutions, with not a single mention of any in the future.

I used to view index funds as a relatively safer way to invest in the market due to the built in diversification, but now I wonder if they were part of the problem. Perhaps one of the problems with the market stems from the fact that there was too much easy money … all those 401(k) and other contributions being regularly dumped into any stock whose named appeared on an index, with no questions asked or demands made on management or the board.

On a slightly different topic, I’ve heard of a few builders who were able to keep up with their loan payments, but were essentially put out of business when their banks called in their lines of credit. It seems a shame that the banks would be allowed to call in lines of credit in the current environment on customers who would otherwise be able to stay in business (and in certain areas of the country, builders had been kept relatively busy repairing flood damaged homes). Putting more businesses out of business and more people out of work just seems counter productive, just as foreclosing on more homes seems counter productive as well.
sandshark222

The government has to leave the private sector alone. All this blind faith in government will lead to further and further let downs. The government has been handing out money like it’s monopoly money and the only thing it will get us is less freedoms and HUGE inflation soon.

These bailouts and nationalizations need to STOP. Let failed companies fail. Let failed banks fail. The free market will work this out, as it always has throughout our 200+ year history.

It’s this panicked mentality thats getting us deeper into the hole. The govt is writing checks for money it doesn’t have, yet increasing power ever more. This is not how we became the super power nation we are today.

The beauty of the free market is that it will always weed out the bad companies, the crooks, and the failures. Thats why recessions happen. It’s like natural selection in the private sector.

Look at all of the nations that nationalize the private sector. Venezuela, Cuba, France. Do we really want to change who we are, and become like them?

It seems like when capitalism stubs it’s toe, everyone is ready to jump ship. Get a grip.

truthtelling007

“The government has to leave the private sector alone”

Fine, except the Private sector came pounding on my tax paying door and demanded to be bailed out.
It then threatened to keep loans from being approved and threatened to seize up the whole economy if it didn’t get its way.

The government didn’t run to the private sector and say, “how can I help you?” did it? It seems that the private sector got in trouble then ran to Congress for a bailout.

What did I miss?

sandshark222

Just because they ask for a bailout doesn’t mean we need to give them one.

truthtelling007

Yes, I got that, didn’t miss that.

But that is easy to say from here. Try being in Congress and getting a ton of calls from Labor unions who are about to have their members out of work due to the collapse of their industry?

I’m all about my micro economics. I don’t buy stock. If I can’t see the property I own, I don’t want to own it.

I don’t take out loans. I learned to stop that 20 years ago.

sandshark222

The labor unions in some cases have caused more harm then help. See Ford, GM. The labor unions were unwilling to flex even for a bailout.

There’s a reason why non union auto manufacturers are doing ok – they don’t have to pay tons of people 70 bux an hour who aren’t even working.

truthtelling007

I don’t disagree that Union leaders corrupt the process. But even in non-union examples, the expectations from workers are entirely predicated on the success vision that their company CEO leader types spill out.

Temper all that expectation, and we might see some stability, no?

“they don’t have to pay tons of people 70 bux an hour who aren’t even working.”

Sorry that is a generalization about unions. I know many union members down here and they aren’t making their money and then not working. They come home after very hard work.

You’ve projected some idea that being a union member means getting paid for nothing just by being in the union, and that maybe so in some example, but sorry, not a realistic generalization.

sandshark222

I didn’t say all unions, I’m just saying in some cases, like with GM, they hurt more than anything.

No matter who’s breathing down the neck of congress, they need to do the right thing and deny bail out funds.

In the end it’s you and me, the American tax payer (at least the 60% of us that do pay taxes) who are footing the bill. It’s not fair.

Government caused this problem, it built up over time, now they want us to suffer the consequences. Amazing how all of these commitees investigating the financial collapse aren’t looking at the guilty culprits in congress. Barney Frank, Pelosi, Reid and Dodd are running around preaching to us about how to save the day.

It’s like calling the arsonist to put out the fire.

truthtelling007

“I didn’t say all unions, I’m just saying in some cases, like with GM, they hurt more than anything.”

Agreed, and I didn’t assume the generalization.

I did demand that my rep, a democrat, deny funds and he did.

I agree that we shouldn’t pick up the tab.

“Government caused this problem”
I disagree with this, but only because it doesn’t demonstrate the responsibility of the private sector fraud and corruption. To place it only one one side seems half the truth.

You might be right, it just doesn’t ring that way here. It took two to tango.

“Amazing how all of these commitees investigating the financial collapse aren’t looking at the guilty culprits in congress.”

Agreed. Corruption on both sides is the right tact in my opinion.

fiscalliberal

George Bush did leave the private sector alone – how did that work out?

It is not the private sector asking for the checks. Isn’t the term, privatize the gains, socialize the losses the norm of the private sector? I for one am not buying that.

Let us remember that the Treasury and SEC directors are private sector people and they will hand it back as soon as it gets stabalized.

Possibly we need to define a new term of true Free Market people with winners, losers and social responsibility to differentate from the present crop of government loving bailout business people.

Most of all we need to hold the Ayn Rand zellots responsible for their actions with real data.

I think Volker is the person we need to be putting front and center.

sandshark222

Well first off Fanny and Freddie were not private sector. They were mostly government run. If you remember it was Bush and McCain who were calling for more regulations on Fannie and Freddie, and it was Barney Frank and Chris Dodd saying that nothing needed to be done, and those companies were on solid ground.

Anyway, if the government never got invoved to begin with on this whole ‘affordable housing for everyone’ kick, the whole housing bubble would not have happened (or at least not to the level it did), and we wouldn’t have this mortgage crisis.

It’s no surprise that the government cronies who helped cause this disaster are pointing the finger at the private sector. Barney Frank is at the heart of this mess.

Sorry folks, this one isn’t dubya’s fault.

Patrick Henry

LD..

Larry…I am a Long time daily reader of NQ…and you are a Great Addition to this site..along with the other talented writers larry and susan have put together..

After reading all of this material and those above who have commented I just keep finding myself agreeing with everything here..and nodding my head..

Todays Opening Market here an globally verify what you say ..The whole focus is on CAPITOL..

I agree with other commentors here..it is all about Unregulated and uncontrolled GREED..inside Wall street..The Government..top down ..and we see the results in all those Indictments over and over..which are just the tip of the Inceberg..IMO..

There were clear warnings ..many Players were exposed and demands for investigations and Over sight were ignored..Much like Larry Johnson and others were about Abuses of power in the bush administration.. Larry andothers have now been proven right..But the DAMAGE has been done..

everyone I talk to agrees with your position on Banks,..and how to solve that problem fast..as painful as it may be for some..

I still ahve friends who have been suckered back into the stock market on what they saw as Buying Opportunitys..and are still taking hits..because this is not a Normal market anymore and the damage greater than MOST can imagine..

I swithced toInsured CD’s long ago..happy with getting 5 1/2 % interest..plus they are ADD ON’s..which is nice..we encouraged friends to do the same long ago..but most didn’t and are now jelous..sadly..

The Unregulated Housing market and Home prices added greatly to this Crisis..Amazing how they did that nationally ..driving up Prices..and the Builders were happy..Local State and county governments were happay bcause that increased revenue for them in the way of tax’s..

I could see long ago it was time to take sheler from the bursting bubble and the TOXIC FALLOUT..

LD

Patrick Henry…thanks for the plug. Glad that I have been able to shed some insight for you and others.

Thank you also for your thoughtful comments so that others in the audience can learn from those as well.

We’re all in this together whether we want to be or not.

Patrick Henry

Add On..

Because of that Busted revenue Bubble…My State, County and city governments are in a Financial Budget crisis too..causing hugh Headachs and Budget Cuts and job Loss’s there too..while facing hugh anticipated loo’s in the future..

I maintain frequent contact with my City councilman..who i campainged for..He keeps me aware of the Citys Budget problems..I told him now they should stop all un~necessary spending projects..(The mayors Fantasys) and try to save ome revenue reserves now,..cause it Ain’t gonna get any better..

Human service are a priority in my opinion..

truthtelling007

here here

Sam

I am not understanding all of this faith and blind trust in the government! I know a lot of federal(and state) employees and they are not even slightly interested in what happens to you and me, that’s for sure. We are bugs, or noseeums as far as they are concerned- we exist only to send money to them and support their needs and infrastructure. The state people have been getting slapped down a bit by economic reality, but the Fed ones are more full of themselves and insufferable than ever. Why are we begging them to save us? We are just asking for it all right.

LD

Sam,

I concur and for that very reason I think that everybody needs to become knowledgeable about what is going on so that we can hold them ACCOUNTABLE as well.

Well said.

fiscalliberal

The writing of the No Doc loans was all unregulated private sector. Greenspan protected them. He admitted his error publicly before the Waxman Overight committee. The SEC head Chris Cox admitted he did not regulate the rating agences ( private sector) like he should before the same hearing.

Most of the traditional regulated banks did not write those No Documentation loans (Country Wide et. al.) which are the real problem. The government did not provide the false AAA rating that the pension funds were relying on. The government did not write the Special Purpose Vehicle’s to hide the money off the balance sheets ( now toxic assets) financed with short term loans. This is Enron all over again.

We need to get rid of this blind ideology, deal with the facts, reign in the greed and get back to what the true free market is where the market determines winners and loosers. If the businesses are to big to fail, bust them up. I think that process is starting.

Dubya enabled it. Cheney and his oil buddies made out like bandits on the public dole.

sandshark222

“Dubya enabled it. Cheney and his oil buddies made out like bandits on the public dole.”

If you really think that’s the cause of this financial crisis, you’re sorely mistaken.

There has been greed on wall street for generations. That didn’t cause the melt down. There’s greed in government too, maybe even more so. You should ask Barney Frank about that.

It was Bush and McCain both calling for increased regulation on Fannie and Freddie, to which the dems in congress scoffed at, saying it was hogwash. If the repubs had pushed it further, the dems would have marched poor people into congress saying the republicans wanted to take away their homes. It would have been political suicide.

In addition to that, ACORN going around, shaking down banks, pressuring for loans to poor and minorities who can not pay them back did not help. Anyone who did not approve these loans was labeled as ‘racist’.

So it’s no wonder that the housing bubble rised and collapsed. It had to come back to reality. The collapse is actually the free market working to correct itself.

The free market will always work out these problems. It’s the natural flow of things, supply and demand. The crisis is due to ARTIFICIAL influence from government, and the free market is fixing it.

Well, now all in the name of ‘fairness’, and ‘affordable housing’, we have a financial disaster. That’s why government needs to butt out.

This is not a failure of capitalism, it’s a failure of socialism injected into capitalism.

Patrick Henry

I have often wondered if this is a DELIBERATE Willful destruction of Capitolism as we Know it..To Mkae the United States more in Lince with the rowing Socialist capitolist Systems in place now in China and Russia..

I wonder if this is being done by design and with malicious Intent…and if so..Who In Our Government and on wall street would be partaking in such a Scheme..?? An Economic COUP that would Force the united states and England..(Bank of England) to have to Adjust because of growing debt..

I once read an Article about KGB Defectors in the past who have tryed to warn the united states government that such a plot to bankrupt America had been initated in Russia..

I don’t think other countrys have forgotten or forgiven past (and currnt) USA Policy..

http://sonicninjakitty.wordpress.com Sonic Ninja Kitty

You may be on to something, unfortunately. Why are we deliberately traveling down an economic path that has been demonstrated to end in misery and poverty?

cynic

We’re in this godawful mess because of the lack of effective government oversight and regulation, that was methodically brought about by overselling the wonders of a free market economy to a gullible nation. It left us wide open to unrestricted predation by the powerful and greedy.

Non-partisan regulatory agencies are supposed to act as fair and unbiased referees. Basically, the fraudulent argument we’ve been sold is that referees only get in the way of the game.
wodiej

well said and unfortunately many who are ignorant of the real facts.

http://sonicninjakitty.wordpress.com Sonic Ninja Kitty

Great info–thank you! Welcome to Vegas.
Sammie

http://finance.yahoo.com/banking-budgeting/article/106471/Political-Interference-Seen-in-Bank-Bailout-Decisions

Thought this was an interesting article regarding how the bailout funds have been allocated so far. I really wish Barney Frank and others who seem to be pulling strings would be investigated.

LD

Sammie,

Thanks for both these links. I agree that Mr. Frank is more part of the problem than the solution.
wodiej

gee…that’s reassuring. Change? NOT.

Sammie

http://finance.yahoo.com/tech-ticker/article/162816/Wall-Streets-Sick-Psychology-of-Entitlement

I guess the sick psychology of entitlement ties into the whole issue of greed.
Interested party

LD/
I’ve read several months ago about Sweden’s approach to their economic problems of the early 90′s. My understanding is that assets where seized, failed one’s liquidated, with the remaining assets sold (back to private enterprise)several years down the road after their value, unladen with unknowns, had appreciated. The eventual costs where very little to Sweden’s taxpayers, some even arguing the government passed the break-even point on cost/return.
Also of note, not all banks participated in the scheme. Some didn’t want the government interfering in their affairs, and chose to tough it out alone. In any case, there was no bail-outs. Bad debts where written-off balance sheets and while some investors lost money, the country as a whole, adverted crisis.

LD

I would not go so far as to say that they did not have a crisis. Your analysis is largely accurate but there were plenty of dislocations in the process.

When a banking institution is nationalized and shareholders are wiped out that does present a whole set of issues.

Ultimately, though, the Swedish authorities handled their banking crisis with great dexterity.

Our economy nad banking system is much larger but I am proposing a similar approach.

Sammie

http://finance.yahoo.com/real-estate/article/106472/Tough-Workouts

A little off topic, but this relates to LD’s everything is negotiable post a little while back. I guess some people have found the banks to not be that responsive.